Transaction costs for firms in the EU ETS: lessons from Ireland

Until now, there has been little empirical evidence that EU Emissions Trading Scheme (ETS) transaction costs are incurred at firm level. The transaction costs (internal costs, capital costs, consultancy and trading costs) incurred by Irish firms under the EU ETS during its pilot phase (2005–2007) were measured and analysed. Evidence for the sources of transaction costs, their magnitude and the distribution of costs shows that these were mainly administrative in nature. Considerable variation in costs was found due to economies of scale, as the costs per tonne of CO₂ were lower for participants with larger allocations. For the largest firms—accounting for over half the emissions—average transaction costs were €0.05 per tonne. However, for small firms, average transaction costs were €2.02—over 18% of the current allowance price. This supports the concerns that transaction costs are excessive for smaller participants. The immediate policy implication is that additional attention will be needed to address different sizes of firms, number of installations per firm, and the size of the initial allocations.     

The (ir)relevance of transaction costs in climate policy instrument choice: an analysis of the EU and the US

This article assesses the relevance of ex post transaction costs in the choice of climate policy instruments in the EU (focusing mainly on the example of Germany) and the US. It reviews all publicly available empirical ex post transaction cost studies of climate policy instruments broken down by the main private and public sector cost factors and offers hypotheses on how these factors may scale depending on instrument design and other contextual factors. The key finding from the evaluated schemes is that it is possible to reject the hypothesis that asymmetries in ex post transaction costs across instruments are large and, thus, play a pivotal role in climate policy instrument choice. Both total and relative ex post transaction costs can be considered low. This conjecture differs from the experience in other areas of environmental policy instruments where high total transaction costs are considered to be important factors in the overall assessment of optimal environmental policy choice. Against this background, the main claim of this article is that in climate policy instrument choice, ex post transaction cost considerations play a minor role in large countries that feature similar institutional characteristics as the EU and the US. Rather, the focus should be on the efficiency properties of instruments for incentivizing abatement, as well as equity and political economy considerations (and other societally relevant objectives). In order to inform transaction cost considerations in climate policy instrument choice in countries that adopt new climate policies, more data would be desirable in order to enable more robust estimates of design- and context-specific transaction-cost scaling factors.

Policy relevance

The findings of this study can help inform policy makers who plan to set up novel climate policy instruments. The results indicate that ex post transaction costs play a minor role for large countries that feature similar institutional characteristics as the EU and the US. For instrument design the focus should rather be on efficiency properties of instruments in incentivizing abatement, as well as equity and political economy considerations (and other societally relevant objectives).     

EU emissions trading and the cement sector: a spatial competition analysis

An oligopoly competition model is described and used to illustrate the potential effect of EU emissions trading and transport issues on the production decisions and profitability of cement producers in a typical western European country market. The role of geography is introduced from three viewpoints: the existence of regional markets, the fact that EU producers may operate multiple plants across these regions, and the possibility of production capacity constraints. A typical EU state is divided into a coastal region which is initially exposed to international competition, and an inland region which is initially protected. Assuming pure auctioning of EU Allowances and a range of CO₂ prices up to €50/t, our model predicts a large increase of imports into the coastal region. Consequences for the inland producers include reduced attractiveness of the coastal market, as well as increased competition from coastal producers and from non-EU imports. The model includes a number of simplifications and therefore does not claim to offer definitive predictions, but our results do suggest that an increase in non-EU imports could feasibly offset more than 70% of the decrease in EU cement sector emissions. The likely impact on producer profits is considered for each region, and the advantages and disadvantages of potential mitigating policy measures are reviewed for either the EU Allowance allocation process or border adjustments on cement products.     

The effectiveness of the EU Emissions Trading Scheme

How effective is the EU Emissions Trading Scheme (EU ETS) in promoting emissions reduction for compliance with the Kyoto Protocol commitment? A theoretical benchmark is determined in order to assess the stringency of the ETS cap and to evaluate whether emissions allowances have been over-allocated. This analysis clarifies how the emissions reduction effort has been divided between ETS and non-ETS sectors, highlighting the extent to which Member States effectively rely on the ETS to comply with their Kyoto commitments. Finally, inefficiencies relating to the over-allocation of allowances are analysed; namely cross-subsidization from non-ETS to ETS sectors, national subsidies to the ETS sectors, and distortion of competition.     

Benchmark-based allocations in EU ETS Phase 3: an early assessment

Phase 3 of the European Union Emissions Trading Scheme (EU ETS; 2013–2020) sees the introduction of new rules governing the free allocations of emissions allowances given to energy-intensive industries. In contrast to Phases 1 and 2, allocations will be based on historical production multiplied by best available emissions technology benchmarks. This article exploits an original database to provide a first analysis of the distributional and economic efficiency implications of the new rules. It is shown empirically that the new allocation rules reduce the scope for windfall gains by EU ETS firms while also effectively mitigating carbon leakage risks, even assuming optimistic forecasts of Phase 3 carbon prices. The example of the cement sector is used to show that benchmarking significantly improves the harmonization of the levels of free allocations to competing firms throughout the EU compared to Phase 2. However, it is also found that the use of ex ante output levels to determine allocations still leaves considerable scope for windfall gains and possible distortions of the internal market.     

Certified emissions reductions and CDM limits: revenue and distributional aspects

The EU allows those installations that are subject to emissions trading to use a limited volume of certified emissions reductions (CERs), generated through the Clean Development Mechanism (CDM), to cover their own GHG emissions. These CERs can be used in addition to the EU allowances (EUAs), which were primarily allocated free to installations in Phase II of the EU Emissions Trading Scheme (EU ETS) from 2008 to 2012. For the year 2008, the CER limits, which are differentiated by EU Member State, created substantial arbitrage rents (due to the CER-EUA spread) of approximately EU€250 million. Different options for the allocation of this rent are discussed and it is found that, according to economic theory, making the right to use CERs tradable or the regulator pre-committing to buying CERs at the level of the relevant limit reduces the inefficiencies connected to the current regulation. Furthermore, auctioning these CER usage rights shifts the rents created through the CER-EUA spread to the Member State itself. The improved design and implementation of CDM limits justifies EU policy makers intervening to correct previously competition-distorting choices.     

Combining cap-and-trade with offsets: lessons from the EU-ETS

Linking a cap-and-trade with an offset mechanism has many theoretical advantages: it reduces compliance costs, extends the price signal outside the cap-and-trade, and triggers technology transfer. However, it is feared that such linking will induce outsourcing of emissions reduction at a low price and undermine the price incentive in the cap-and-trade. The EU Emissions Trading Scheme (EU ETS) is the first full-scale example of a cap-and-trade system linked to project-based mechanisms such that offsets have effectively been used by industrial installations. This article is an ex post analysis of EU ETS data for the years 2008 and 2009, and the characteristics of the link and its efficiency are evaluated. Although offsets have been much used, their use is concentrated and not very intense or frequent, which allays the fear that offsets will flood the market. Although the majority of surrendered CERs effectively come from the largest and oldest projects, the credits surrendered are similar to those available on the market. Possible factors that contribute towards inefficiency are the rules for using offsets, transaction costs affecting the participation of small installations, awareness and openness to market-based instruments, and uncertainties regarding CERs offer and demand from other markets. However, the impact on EUA equilibrium price still needs to be quantified.     

The impact of administrative transaction costs in the EU emissions trading system

This article empirically investigates the impact of transaction costs for monitoring, reporting, and verification (MRV) of emissions on companies regulated by the EU Emissions Trading System (EU ETS) in Germany. Based on a unique panel dataset, we investigate if MRV costs are dependent on the amount of annual emissions of regulated companies and if there are differences in transaction costs between economic sectors. The results indicate that administrative costs are dependent on the amount of annual emissions for larger companies, which has implications for the economic efficiency of the EU ETS. The most important finding, however, is that there are significant differences in MRV transaction costs dependent on the type and size of companies. This implies the existence of considerable economies of scale. Overall, the EU ETS could benefit from reforms by means of a push towards upstream regulation as this would likely increase administrative efficiency.

Policy relevance statement

Transaction costs are, among other things, an important aspect of market-based climate policy design. A policy instrument with low transaction costs is preferred over instruments with larger transaction costs under equal conditions. This is occasionally referred to as administrative efficiency, and its importance was acknowledged in directive 2009/29/EC of the European Commission. Thoughtful empirical examination of transaction costs is essential in order to inform about the extent and impact of these costs. This article provides an analysis of transaction costs for monitoring, reporting, and verification (MRV) of emissions in the EU ETS. It is shown that administrative costs will likely have negative effects on the cost efficiency of the EU ETS. However, the most relevant finding is that small companies (<250 employees) or firms emitting small amounts of carbon dioxide per year face far higher average transaction costs compared with larger firms or emitters. Thus, there is a tendency for the EU ETS to cause MRV transaction costs that are disadvantageous for small companies. A regulation that is more upstream-oriented could mitigate this negative effect to some extent. The EU ETS could initiate a reform that is targeted on putting a price on the carbon content of fossil fuels instead of directly regulating emissions in a so-called ‘end-of-the-pipe’ way at the installation level.     

Electricity regulation in the Chinese national emissions trading scheme (ETS): lessons for carbon leakage and linkage with the EU ETS

Carbon leakage is central to the discussion on how to mitigate climate change. The current carbon leakage literature focuses largely on industrial production, and less attention has been given to carbon leakage from the electricity sector (the largest source of carbon emissions in China). Moreover, very few studies have examined in detail electricity regulation in the Chinese national emissions trading system (which leads, for example, to double counting) or addressed its implications for potential linkage between the EU and Chinese emissions trading systems (ETSs). This article seeks to fill this gap by analysing the problem of ‘carbon leakage’ from the electricity sector under the China ETS. Specifically, a Law & Economics approach is applied to scrutinize legal documents on electricity/carbon regulation and examine the economic incentive structures of stakeholders in the inter-/intra-regional electricity markets. Two forms of ‘electricity carbon leakage’ are identified and further supported by legal evidence and practical cases. Moreover, the article assesses the environmental and economic implications for the EU of potential linkage between the world’s two largest ETSs. In response, policy suggestions are proposed to address electricity carbon leakage, differentiating leakage according to its sources.

Key policy insights

• Electricity carbon leakage in China remains a serious issue that has yet to receive sufficient attention.

• Such leakage arises from the current electricity/carbon regulatory framework in China and jeopardizes mitigation efforts.

• With the US retreat on climate efforts, evidence suggests that EU officials are looking to China and expect an expanded carbon market to reinforce EU global climate leadership.

• Given that the Chinese ETS will be twice the size of the EU ETS, a small amount of carbon leakage in China could have significant repercussions. Electricity carbon leakage should thus be considered in any future EU–China linking negotiations.

     

The EU as a frontrunner on greenhouse gas emissions trading: how did it happen and will the EU succeed?

The objective of this paper is first to provide empirical evidence of what can be seen as a rather remarkable change in EU’s position on the use of greenhouse gas (GHG) emissions trading (ET) in climate policy, from the role of a sceptic in the run-up to Kyoto towards more of a frontrunner. The paper argues that there is a synergistic and multilevel mix of explanatory factors for this “U-turn”, including developments at the international, EU, Member State, sub-national, and even down to the personal level. Second, the paper explores and discusses the philosophy behind the Commission’s proposal for a directive on GHG ET. Third, the paper examines the prospects for ‘success’ of a scheme for EU-wide ET using a multifaceted set of metrics. In brief, we argue that output success—the chances for having a directive adopted—hinges on the resolution of two key issues. First, whether the preliminary phase is to be mandatory or voluntary, and second, incompatibilities with domestic ET schemes. Outcome success—steering and cost-effectiveness—will in turn depend on factors like the coverage of the scheme and inclusion of project-based credits, while more long-term political implications hinges on the successful adoption and operation of the scheme.

“The Proposal on emissions trading represents a major innovation for environmental policy in Europe. We are de facto creating a big new market, and we are determined to use market forces to achieve our climate objectives in the most cost-conscious way […]. The emissions trading system will be an important cornerstone in our strategy to reduce emissions in the most cost-effective way”.

Environment Commissioner Margot Wallström.     

构建一个经济-气候新模型评价气候变化对粮食产量的影响

将气候变化研究和农业经济研究相结合,构建了一个经济-气候新模型,用来评价全球气候变化对粮食产量影响的问题。提出在经济模型C-D生产函数中添加气候变化因子,建立一个新的评价模型,作为连接气候变化因素和经济变化因素的桥梁,并对该模型的性能及合理性进行了初步的模拟和验证。     

Effects of a Remotely Sensed Land Cover Dataset with High Spatial Resolution on the Simulation of Secondary Air Pollutants over China Using the Nested-grid GEOS-Chem Chemical Transport Model简

A number of remotely sensed land cover datasets with spatial resolutions ~〈 1 km have recently become available or are in the process of being mapped. The application of these higher resolution and more up-to-date land cover datasets in chemical transport models （CTMs） is expected to improve the simulation of dry deposition and biogenic emissions of non-methane volatile organic compounds （NMVOCs）, which affect ozone and other secondary air pollutants. In the present study, we updated the land cover dataset in the nested-grid GEOS-Chem CTM with the 1 km resolution GLC2000 land cover map and examined the resulting changes in the simulation of surface ozone and sulfate over China in July 2007. Through affecting the dry deposition velocities of ozone and its precursors, using GLC2000 in the dry deposition module can decrease the simulated surface ozone by 3% （up to 6 ppb） over China. Simulated surface sulfate shows an increase of 3% in northwestern China and a decrease of 1% in northern China. Applying GLC2000 in the biogenic emissions of the NMVOC module can lead to a 0.5--4.5 ppb increase in simulated surface ozone over East China, mainly driven by the larger cove~：age of broadleaf trees in East China in the GLC2000 dataset. Our study quantifies the large sensitivity to land cover dataset~ with different spatial resolutions and time periods of simulated secondary air pollutants over China, supporting ongoing research efforts to produce high resolution and dynamically updated land cover datasets over China, as well as for the globe.